IDB Chief Tackles Economic, Political Perils of Latin America

Uploaded on November 18, 2010

Every other day, it seems, a firebrand populist spewing anti-American rhetoric is elected president of a Latin American country. Last year, 10 national elections were held south of the Rio Grande—and five of them were won by leftists. In two more, the anti-U.S. candidate narrowly lost.

Luis Alberto Moreno says that’s because tens of millions of the region’s poorest inhabitants feel they’re not enjoying the fruits of Latin America’s newfound prosperity. Moreno, 53, is president of the Inter-American Development Bank, a multilateral lending institution created in 1959, headquartered in Washington, and owned by 47 countries—26 of them in Latin America and the Caribbean.

“The economic situation in our region is the best it’s been in many years,” Moreno told The Washington Diplomat in an exclusive interview. “Latin America has had four years of economic growth and the debt-to-GDP [gross domestic product] ratio is now below 50 percent.

“Today, there’s no inflation, fiscal deficits are in check, and countries have current-account surpluses,” he adds. “All of that is good, but it has not translated as quickly to millions of people. That explains the region’s dramatic increase in kidnappings, robberies and murders.”

All of them, to one degree or another, have rejected Washington’s model of a hemispheric Free Trade Area of the Americas, emphasizing instead programs that focus on social justice and indigenous rights.

Even so, Moreno argues, “Latin America is less to the left than the press would like you to think. This whole idea of leftist movements in Latin America makes for good headlines, but the reality is that many of these governments have very solid microeconomic management. That’s largely due to the fact that Latin America went through some very difficult times and developed a cadre of very good technocrats. “Brazil is a good example,” he continues. “Lula comes from the Workers Party, and he’s made very difficult reforms on social security and foreign-debt reduction. I mention Brazil because it’s such an important country, representing 40 percent of Latin America’s population.”

In Moreno’s opinion, Chile, Costa Rica and Panama have made the most progress in fighting poverty.

“Bolivia is a different story,” he says. “Morales has taken some decisions that are going to make it difficult to attract private investment. Remember that 60 percent of Bolivia’s population is indigenous. It was only natural that, sooner or later, an indigenous leader would be elected.”

Out of roughly 500 million people, close to 200 million Latin Americans live on less than a day. “This is the biggest issue for the bank: building social cohesion,” Moreno says. “Despite becoming more empowered politically, all this good economic news hasn’t really trickled down to these people, and that’s really the issue. The gap between rich and poor in Latin America is the widest in the world.”

Moreno, Colombia’s popular former ambassador to the United States, is only the fourth president in the IDB’s 48-year history. After seven years of heading the Colombian Embassy, he took over the helm of the IDB in October 2005 from Uruguay’s Enrique Iglesias, who had led the IDB for 17 years.

Last year, according to Moreno, the bank approved 112 projects for close to .4 billion and made almost .5 billion in disbursements, an 18 percent increase over 2005. That included 76 loans for public-sector investment projects totaling close to .6 billion, 17 policy-based loans for nearly class="import-text">2007February.IDB.txt.8 billion, and 19 operations without sovereign guarantees for 4 million. The latter category of loans and credit guarantees was made possible thanks to new policies that raised the cap for such operations and expanded them to more sectors.

In November, for example, the IDB approved a million loan to Venezuela for construction of the Tocoma hydropower project, whose total cost is billion. The plant will have an installed capacity of 2,160 megawatts and is expected to be operational between 2012 and 2014. The plant will be built, operated and maintained by CVG Electrificación del Caroní C.A. (Edelca), a state-owned company.

A month later, the IDB loaned Costa Rica million for an urban poverty alleviation program that combines investments in basic infrastructure, social services and land-tenure regularization in 31 marginal neighborhoods of San José.

The investments are expected to benefit some 9,000 poor families by expanding their access to better-quality social services and infrastructure improvements in their communities, which will in turn raise the value of their properties.

Similarly, Bolivia will benefit from a 0 million IDB loan aimed at improving the Santa Bárbara-Rurrenabaque section of the Northern Corridor highway. The project will reduce travel times in the mountainous region, lower vehicle operating costs, and provide continuous access throughout the year with better road safety conditions. It will also boost economic activity by linking zones with agricultural and ranching potential to Bolivia’s main centers of commercial activity.

The loan features a 40-year grace period, with an interest rate of only 1 percent during that grace period and 2 percent thereafter.

“We are unique in that a traditional loan from our bank will go up to 20 years, with a 10-year grace period. The cost of funds from our bank is perhaps the lowest any country can get on the market,” Moreno explains. “We charge on average about 30 basis points over the cost of funds.”

Nevertheless, “we cannot continue with business as usual,” says the IDB chief. “I basically have focused on realigning the bank, modernizing it to make it more attuned to the needs of the hemisphere, and developing the right kind of management skills to be more flexible.”

He adds: “Our challenge is how to remain relevant at a time when most countries in Latin America can access capital markets for their financing needs. Collectively, countries are always thinking about how best to engage multilateral institutions. For this reason, we have to provide more knowledge behind our lending. We’ve got to be able to build opportunities for the majority. We’ve got to be strong in working for poor people in the middle-income countries of Latin America.”

Moreno highlighted the need to increase IDB effectiveness by strengthening its operations program and deepening its presence in its markets. He believes the bank must enhance its relevance by improving expertise in areas such as education, health, water and sanitation, and bio-fuels.

“Infrastructure is one of the major needs of our hemisphere,” Moreno says, estimating that Latin America requires billion in infrastructure investments per year—ranging from power plants and roads to bridges and hydroelectric dams.

“Half of our lending—by a decision of our shareholders—is devoted to social investment,” he says. “We’re very proud of having things like conditional cash transfers, a program developed in Mexico with IDB support. It is directed at families that ordinarily would not send their kids to school because they need those kids to go out and work to augment the family income. The cash transfer is given on the condition that the kid does go to school.”

The IDB also has a program in place to help countries make more productive use of money flowing from the United States in the form of family remittances. According to a recent IDB study, immigrants living abroad sent billion last year to their families living in Latin America and the Caribbean (see sidebar).

“The real challenge we have is to turn those remittances into productive remittances,” Moreno says. “Instead of sending money to pay rent, you can buy a home. Instead of paying for health insurance, you can pay for your kid’s education. But those kinds of things require the development of products that can be sold to immigrants here or people in Latin America. In Mexico, where a third of all the remittances are going, 50 percent of them are sent through bank accounts. But that’s not the case in other countries.”

Moreno argues that the IDB—which employs 2,000 people and has an annual budget of 0 million—must bring certain ongoing projects to completion, such as debt relief and the use of concessional resources. He adds that the bank should also consider extending IDB membership to other countries beyond the current 47 members.

“Trans-Pacific trade is the fastest-growing trade anywhere in the world. Last year, 53 percent of China’s foreign investment went to Latin America,” he says, revealing that the IDB is in “preliminary talks” to admit China as the institution’s 48th member state.

Another important development is the rise of free-trade agreements, such as the one the United States signed last year with Moreno’s native Colombia.

“During the years of the Bush administration, trade blocs have advanced a lot. Before, you only had Mexico,” Moreno explains. “Now, the U.S. has free-trade agreements with Central America, Chile, Colombia and Peru—10 countries in all. I think that’s a real accomplishment. Look at NAFTA [North American Free Trade Agreement]. The unemployment rate in Mexico really came down as a result of NAFTA. Today, unemployment there is around 2.5 percent, one of the lowest in the hemisphere.”

Moreno says that even though the administration’s much-hyped Free Trade Area of the Americas never came into being, “there’s a real possibility of a successful Doha round” leading to hemispheric-wide free trade.

At present, the United States accounts for 30 percent of the IDB’s shares and voting power, while Latin American and Caribbean countries collectively own 50 percent. (European countries and Israel own 11 percent, Japan 5 percent, and Canada 4 percent.)

“It’s a very interesting makeup, in that 50 percent of the shares are in the hands of the lending countries,” Moreno says. “That’s not the case with the World Bank or the IMF [International Monetary Fund]. This works more like a credit union of sorts.”

Moreno says the IDB enjoys “tremendous recognition” as the premier lending institution in Latin America. “The history of the IDB is very much intertwined with the last half century of economic development in Latin America. In that context, the bank has done many things, and I’ve had a chance to travel to many countries where we lend to, and where we have our donors.”

On an average day, Moreno arrives at 8:30 a.m. and doesn’t leave until 8 p.m. The day after our interview, Moreno flew to El Salvador for a two-day trip and had only two days to recover before leaving again, this time for Ecuador.

“Travel is a very tough part of this job,” the IDB president admits. “When you’re ambassador in Washington, most of your life is dedicated to what happens inside the Beltway. But when you’re the president of the IDB, you’ve got to get outside the Beltway to the 26 countries where you have activities. That means constant demands on your time. The terrain is so different.”

He adds: “Of course, Colombia is still my country and I work a lot here on advancing U.S.-Colombian relations, and I keep in touch with President [Alvaro] Uribe.”

Last year, he notes, the Colombian economy grew by 7 percent, despite the country’s reputation for lawlessness, violence and drug trafficking. “I think the violence in Colombia has forced people to be more aware of social needs and react better to crises. But at the same time, we have had uninterrupted growth for 70 years,” he says. “There’s a very deep feeling in Colombia that you don’t fool around with economics.”

IDB Tries to Put Remittances To Better Use in Latin America

The back roads of El Salvador—Central America’s smallest and most densely populated country—are plastered with billboards advertising Western Union, MoneyGram and a dizzying variety of lesser-known, local wire-transfer services.

No wonder. This year, El Salvador will receive billion in family remittances from the United States. Equivalent to 16 percent of gross domestic product, that makes El Salvador more dependent on these “remesas” than any other country in Latin America.

This is because an estimated 2.9 million Salvadorans live abroad—95 percent of them in the United States (including about half a million in the Washington, D.C., area). These hard-working expats now send an average of class="import-text">2007February.IDB.txt,000 a year to their families back home.

But, as in the rest of Central America, the money has done little for El Salvador’s financial system or economic development in general.

The Inter-American Development Bank is trying to change that.

“The banks are just acting like money-transfer agencies,” said Donald Terry, head of the IDB’s Multilateral Investment Fund. “They’ve gotten involved in transferring the money, but not offering the people bank accounts, so the money still stays outside the financial system, which is crazy.

“We believe that, if given a chance, this can be a good business for the banks. We can turn these remittances into economic development programs,” he said. “You get more economic development when people become more credit-worthy. You get a much higher multiplier effect if people can get small-business loans or home mortgages.”

Last year, according to the IDB, migrants in the United States, both legal and undocumented, sent a record billion to support relatives throughout Latin America and the Caribbean—a 51 percent jump compared to 2004. These Latino workers in the United States wired an average of 0 a month to their families, with the bulk of remittances coming from California, Texas and Florida—all states with large Hispanic populations.

According to the IDB, before 2000, the money-transfer operators kept 10 percent or more of each transaction as a fee, while at least another 5 percent was charged through an ever-changing system of foreign-exchange markups. Since then, the study shows, the average cost of sending 0 from the United States to Latin America has dropped considerably, to , or 5.6 percent of the total transaction as of mid-2006.

“This is an easy way for the banks to make some money, but there doesn’t seem to be much interest in getting these people as customers,” IDB consultant Greg Watson told The Washington Diplomat. “We found that 54 percent of these funds are being distributed through a type of deposit institution,” he said. “But in many of these cases, large banks are acting like a bodega [corner store] for the money-transfer companies. You’ve got 10 million families throughout Latin America coming in and picking up their remittances at a separate window, but these financial institutions aren’t offering these people bank accounts.”

The culprit? Cultural and historic barriers, says Watson. “There’s a perceived lack of profitability, a deficiency of product, and legal and regulatory obstacles. The main problem is a lack of commitment by management to serve these people, and cultural assumptions that the poor don’t save any money. Yet surveys we’ve done have shown that in the few cases where a concerted effort has been made to turn remittance customers into deposit-holders, they’ve had a 30 percent success rate.”

Extrapolating this, Watson argues, “If banks were to seriously approach the recipient market in the region and convert these people into deposit accounts, it could easily result in more than 3 million new clients and class="import-text">2007February.IDB.txt billion in deposits every year—and this is a very conservative estimate.”

Sam Fox, senior director for Latin American-structured finance at Fitch Ratings, observed: “Every one of those banks wants to increase their retail footprint for this segment of the population that receives remittances.” However, it’s not so easy. “These people don’t use banks. A lot of them don’t even have bank accounts,” Fox said. “They live their lives in a cash world. They’ll take 0 they get in a remittance and buy food with it. What all the banks want to do is tie in that segment of the population and make them customers of the bank and start offering them services. They think there’s significant growth potential among all these people who don’t use the banking system. They recognize the power of remittances, and all this cash that goes through this system but doesn’t stay in it.”

According to the IDB’s Watson, 85 percent of the funds wired to El Salvador in the form of remittances go to consumer spending—anything from groceries to TV sets to cell phones to paying utility bills. “Surveys also show that about 10 percent of remittances are saved in some manner, outside of the formal financial system—like in a jar or a shoebox,” he said.

When banks do make the effort to tap into this market, it often works. The IDB cites as “significant examples of this success” Ecuador’s Banco Solidario and El Salvador’s Banco Salvadoreño. “In both cases, the institutions have consciously created products to meet the needs of remittance recipients and have enjoyed increased deposits and market share,” according to the IDB.

Another bank that’s making a difference is El Salvador’s Banco ProCredit S.A. Stefan Queck, the bank’s general manager, said ProCredit has 28 branches throughout the country. It handles 12,000 to 15,000 remittance transactions a month totaling .5 million to million, translating into roughly 0 per transaction.

“Essentially, we are trying to enhance customers’ possibility for using remittances. Some of these things are not overly innovative, but having a debit card and access to an ATM would be a new thing for these people,” said Queck, whose bank is working with the IDB on a remittances project.

“You have a high degree of people here who live off family remittances. It’s a substantial part of their income. You also have a proliferation in the U.S. of agencies that provide that service; they’re essentially sub-providers. Over the last couple of years, the traditional providers have looked for additional outlets, and a number of alternative conduits have sprung up.”

Queck said he’d like to offer his customers a “safe conduit” for their money to build a solid base for their future, noting that “our intent is to draw in people who receive remittances into the financial system.”